A MIXTURE OF FLUKE AND PARADOX

Christopher Fildes argues that Kenneth Clarke must forge

an economic policy on purpose rather than by accident, and that he must preach austerity

Washington THE JAPANESE correspondent turned to me and whispered, 'Is that Minister Clarke?' Yes, I said. 'How does he speak English?' Very fast,' I said. The correspon- dent winced and switched on his tape recorder, and the Chancellor was off.

What a difference a year makes. Last September, here in Washington, Norman Lamont was perching in the rose garden of Dumbarton Oaks, an implausible survivor of the collapse of the pound and British policy. Jaunty as ever, he claimed to have been singing in his bath. The bankers and finance ministers were not impressed. They had gathered for their annual bout of intrigue and deal-making around the meetings of the International Monetary Fund and World Bank, and it was a pity, in a way, that we could not have kept the pound up for a few days longer. As things were, Britain was the butt of the meetings, and Mr Lamont went home as fast as possible (by Con- corde), leaving the Governor of the Bank of England to take the flak and make the speeches.

This year's Chancellor has a happi- er story to tell, coming as he does from one of the few big countries Whose economies are actually grow- ing. He needs no encouragement to speak up. Rattling away, he some- times gets his vocabulary back to front and, though he seems to know what he means, does not always mean what he says. Demurely he maintains that he has come to his first IMF meeting to learn, and not to give gratuitous advice to other people, so goodness knows what he will say or will sound like if he ever gets steam up.

He is the beneficiary of a fluke and of a paradox. This time last year we had a recession which would not go away and an economic policy which had just collapsed, along with the currency. It so happened that the collapse cured the recession, and the recession shielded us from the ill- effects of the Collapse. As Lord Melbourne said of the Order of the Garter, there was no damned merit about it. The fluke, as flukes go, has gone well, but will not go on by itself. What we need now is an economic policy that is being conducted on purpose, and that should be where Mr Clarke comes in.

We fluked a devaluation of the pound. In fact we conceded it at pistol point, having spent untold billions trying to avoid it. Poli- cy makers took it as a crushing defeat of their attempts to repress inflation. That is how most devaluations fail. They run away into the sands of inflation, which is, after all, only the depreciation of the currency by another name. Some devaluations avoid it, and succeed. They work by making the economy more competitive and switching its whole balance away from importing and towards the export markets. That can only happen when the home market is flat, with no demand for imports for our own goods and services. A year ago, debt and reces- sion had left a trail of misery and lack of confidence which was just what was needed — though that, too, of course, was an acci- dent.

So we now have inflation reassuringly low (though beginning to creep up again) and an economy which is responding to a cheaper pound and cheaper money by stag- ing a recovery — fitful and bumpy, and slowing down a bit at present, but a recov- ery it is. An incoming Chancellor must be tempted to accept it and be grateful, argu-

ing that if someone has leant on the right button by accident and pressed it, then it might as well stay pressed. His predecessor fostered the idea. Much of the hard work, said Mr Lamont in his resignation speech, had already been done.

He could more accurately have said that much of the easy work had been done, and the hard work left for another day and another Chan- cellor. It may be right (it certainly was right) for a Chancellor to cut interest rates and let the pound fall, but no one could say that was hard. It might even be right to let the public finances go, in the Keynesian hope that public spending and bor- rowing would carry the economy through the recession — but that was not hard, either. The hard part is getting the public finances back under control, which must mean less borrowing and ought to mean less spending, and that part has barely begun. So Mr Clarke is soft- ening us up for an unpleasant bud- get on 30 November. Here comes the hard part.

Borrowers cannot be choosers.

Thus far the Bank of England has kept the buyers coming for the British Govern- ment's paper debt, hot off the printing presses at Debden at a rate of £1 billion a week. Even so, the demand for Britain's fastest growing export cannot be unlimited, and plenty of other governments are com- peting to supply it. Belgium and Italy are now so hooked on borrowing that their only way out of debt is to be taken over — no wonder they were so miffed when the Exchange Rate Mechanism stopped work- ing and European Union receded. As for Mr Clarke, he plans this year, as he admit- ted this week, to borrow 8 per cent of the country's total output of goods and ser- vices. Five years ago the Exchequer was in surplus.

What has happened is that the economic cycle and the political cycle have got out of kilter. It is now 18 months since the Con- servatives shook themselves by winning the election. A standard model Conservative government loosens the reins before an election and tightens up afterwards — easi- er to do if there has been a change of Chancellor. John Major's government, back in office with the same Chancellor, did not dare tighten up. Its monetary policy was far too tight already, and if its fiscal policy (its borrowing and spending) was too loose, maybe the two bad policies would cancel each other out. That did not happen.

It is obvious now — it was obvious then — that the time for a clean start was a year ago, when our commitment to the ERM collapsed. 'What Mr Lamont's new policy needs,' I wrote from Washington, 'is a credible Chancellor.' He now says that if he had known that the Prime Minister was going to sack him, he would have resigned. One way and another, it was an opportuni- ty missed. His professions of commitment to a discredited policy came back to haunt him. In a fixed exchange rate system, so he told the House of Commons, ministers must say such things. And bankers? In his new career, I hope he will not airily dis- claim some promissory note of N.M. Roth- schild's — 'In a merchant bank, directors must sign such things.' That would seriously overtax Sir Evelyn de Rothschild's sense of humour.

Mr Lamont stayed in office with weak- ened authority for two rounds of negotia- tions on public spending, and one budget. Last year's public spending round was a disaster for the Treasury, and this year's had to be settled in June with a Chancellor on his way out. As to the budget, its distinc- tive feature was the post-dated tax increase, combining maximum unpopulari- ty and political damage with zero revenue. This cheque has yet to be presented, and when it is, Parliament may bounce it.

Kenneth Clarke will step up for his first budget knowing that, in political and eco- nomic terms, capital has been squandered and time has been lost. This Parliament is a third of the way through its life, and a year has been consumed in civil war over Maas- tricht. The Government's forces are bruised and potentially mutinous. Well may the Prime Minister rue his dependence on eight MPs who, to his mind, are two sand- wiches short of a picnic. He himself (as Lord Tebbit says) could be eight lunatics short of a majority.

The Treasury has obviously told Mr Clarke, as it always tells Chancellors, to do what he can in advance to depress expecta- tions, so that on the day his budget comes as a relief. Even so, he is certain to have to ask his party to carry a Finance Bill with something for everybody to dislike. How can he rally his dispirited troops to the charge? Only by looking like a Chancellor who does things on purpose.

What he still has to do on purpose is to make devaluation work. This time, it could. At today's exchange rates and with produc- tivity improving fast, British goods and ser- vices are distinctly competitive. The 'This one is only interested in my mind.' mistake would be to think that, after years of largely pointless misery, things have come right and we can now relax. We could quite easily drift back towards another High Street boom, with consumers gaining confidence from a recovery in house prices — and what a danger signal that would be. We should be on the familiar cycle of rising consumption, rising inflation and a worsen- ing balance of payments. The sage of Lom- bard Street, Professor Tim Congdon, tells us not to worry about the trade gap because the value of our overseas invest- ments will make up for it. That is like say- ing that we as individuals can overspend our incomes because our houses will be worth more and more. There is, as we found out, a catch in that. What goes with devaluation and makes it work is austerity.

Austerity is one of the few words that Mr Clarke has not yet used at these meetings. He has praised the competitive state of British exports, and complained about the uncompetitive state of our markets in Europe, with their needlessly high interest rates and sclerotic regulation. This, he says, is no way to get Europe back to work.

As for us, he says we have had the bene- fit of monetary relaxation, and of what he calls 'an announced programme' of fiscal tightening. We shall have to see what it is like when it gets beyond being announced, and arrives.

The Chancellor gave us three clues. One was a clear statement of preference for taxes on our spending, rather than our sav- ings and incomes. So that's that. One was a hint that the Treasury's forecast for the budget deficit might, for a change, turn out to be an over-estimate. The other was a presentational change. From now on, the public accounts will show capital and cur- rent spending separately. I am all for infor- mative accounts, so long as ministers can understand the information. They too easi- ly tell themselves that capital spending is investment and infrastructure and hooray, but that current spending is payrolls and hand-outs and boo! This is a formula (as I have been saying) for overbuilt schools and dud teachers. It is also a new excuse for ministers who are trying to defend their pet projects. In last year's public spending round, at a time of extreme financial strain, not one project bit the dust. That was a sure sign of weakness. To govern, as Charles de Gaulle said, is to choose. This government, though, has a tendency to duck choice or defer it — as happened a year ago when the opportunity was missed to choose a new Chancellor.

We have one now, and while he is here he might ask his hosts about Huey 'King- fish' Long, the elected tyrant of Louisiana. The Kingfish had a phrase that Kenneth Clarke could adopt for his own: 'One of these days the people of Louisiana are going to get good government — and they aren't going to like it.' They might, though, and we might, if it seems to be happening on purpose.